2017 Accounting for Tax Reform GAAP Basis

Transcription

1 2017 Accounting for Tax Reform GAAP Basis

2 Presenters Allan Autry Principal, CPA Johnson Lambert LLP Sarah Stubbs, CPA Principal Johnson Lambert LLP 2

3 Agenda Effect on Current Taxes Effect on Deferred Taxes Stranded Tax in AOCI December Significant Transactions Financial Statement Presentation Footnote Disclosures Final Thoughts 3

4 Effect on Current Taxes 2017 current tax still determined at 34% or 35% Include your prior year true-up, if any Taxable income = $300,000 Tax rate 34% 2017 tax $102,000 Current tax incurred $102,000 Income taxes payable $102,000 4

5 Effect on Deferred Taxes For the purpose of discussion, let s assume: Change 2017 Change at 34% DTA #1 $400,000 $200,000 68,000 UNR Loss 150,000 50,000 17,000 Net 550, ,000 85,000 5

6 Effect on Deferred Taxes The usual adjusting journal entries: Deferred tax asset $68,000 Change in deferred income tax $68,000 Deferred tax asset $17,000 Unrealized loss through OCI $17,000 6

7 Effect on Deferred Taxes Next, let s consider the effect of tax reform Dec. 31 Net DTA at 34% 187,000 Dec. 31 Net DTA at 21% 115,500 Difference (Net DTA at 13%) 71,500 Change in deferred income tax $71,500 Deferred tax asset $71,500 7

8 Stranded Tax in AOCI We have now created a mismatch! Entire impact of applying the 21% rate hit the income statement including the unrealized DTA Net unrealized sitting in AOCI at 66% But shouldn t it be at 79% under tax reform? 8

9 Stranded Tax in AOCI FASB issued an exposure draft on January 18 Intent is to patch, not change, existing rules Would allow a reclass of the difference within AOCI Will not appear in statement of OCI Will appear on statement of change in equity Expected to issue after their February 7 meeting Cannot adopt until FASB issues the ASU If financials issued before the ASU, expect to apply the reclass in

10 Dec Significant Transactions Why is this time period of concern? December 22 = tax reform enactment date Technically, ASC requires the effect of changes in tax laws and rates to be recognized as of the date of enactment Determine DTA(L) and income taxes incurred as just described at 12/22/17 Then, period from Dec subject to familiar GAAP rules 10

11 Dec Significant Transactions Realistic view unless you have a significant transaction, just determine the effect of tax reform as of December 31 What constitutes a significant transaction? Acquisition of a company Acquisition of significant fixed assets Significant change in investment portfolio Novation agreement/lpt Other significant transactions? 11

12 Financial Statement Presentation Income statement One line for Income tax expense (benefit) Comprehensive income statement Unrealized position net of 34% or 35% Tax reform effect is not obvious here FASB ASU will not change these statements 12

13 Financial Statement Presentation Balance sheet Net deferred tax asset or liability at 21% AOCI reported net of 34% or 35% tax rate Statement of changes in equity Only affected in 2017 if ASU is issued Add in a line to reclass the stranded (excess) tax from AOCI to RE FASB ASU will change these statements 13

14 Footnote Disclosures Components of income taxes incurred Current income tax incurred Change in deferred income tax Impact of legislative rate change Effect of legislative rate change must be disclosed somewhere in the financials 14

15 AICPA Example Disclosures Illustrative Disclosure Subsequent Event The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. We are in the process of analyzing the final legislation and determining an estimate of the financial impact. 15

16 AICPA Example Disclosures Illustrative Disclosure Impact The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, We have recorded a tax benefit of $XM, primarily due to a re-measurement of deferred tax assets and liabilities offset by the impact of the transition tax on deemed repatriation of deferred foreign income. 16

17 AICPA Example Disclosures Illustrative Disclosure No Material Impact The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, The law includes significant changes to the U.S. corporate income tax system, including a federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. We do not expect the legislation to have a financial impact on the partnership because, as a partnership, it is not subject to federal income tax and the tax effect of its activities accrues to the partners. 17

18 Example Disclosure for 2018 ASU Reclassification The Company adopted Accounting Standard Update 2018-XX which requires entities to reclassify from accumulated other comprehensive income (loss) to retained earnings stranded tax effects resulting from the newly enacted federal income tax rate. The reclassification amounted to ($YY,YYY). 18

19 Final Thoughts Loss discounting transition rules Requires revaluation of the 2017 discount Amortize the difference over 8 years IRS has not yet issued discount factors to calculate Should you estimate? SEC issued Staff Accounting Bulletin 118 Generally, make estimates about the impact of tax reform What if sufficient info is not available to estimate? If you cannot make a reasonable estimate, then make no estimate! 19

20 Final Thoughts AMT Credits AMT is repealed as of January 1, 2018 Credits become refundable as of December 31, 2017 Report in 2017 either as DTA or as recoverable Valuation Allowance Consider all effects of tax reform when setting 21%, AMT repeal, elimination of deductions, etc Effects future taxable income, ability to realize benefits 20

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22 Disclaimer This presentation is provided solely for educational purposes to Johnson Lambert LLP s intended audience. The content contained herein should not be relied upon as accounting or tax advice because it does not take into account any specific organization s facts and circumstances. The views expressed by the presenters are not necessarily those of Johnson Lambert LLP. This presentation is 2018 Johnson Lambert LLP. All Rights Reserved. Johnson Lambert LLP is a niche-focused CPA and consulting firm, focused on serving distinct industry niches. For over 30 years, we have focused on providing audit, tax, and consulting services to a national and selectively international client base including insurance entities, nonprofit organizations, and ERISA-qualified benefit plans. For more information about Johnson Lambert LLP, please visit